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Last week, XI Technologies hosted a room full of oil and gas industry leaders to discuss plans of action with Asset Retirement Obligations. XI assembled a panel of experts within the industry covering best practices for ARO from the perspectives of finance, legal, insurance, environment, and production to cover many of the areas touched by this issue. Panelists gave short presentations from their perspectives and answered questions from those in attendance on the subjects that affected them most.
Figure 1 – Oil and gas industry leaders gathered for XI Technologies’ ARO Best Practices Leadership Panel on November 14, 2019.
“There’s a lot of talk in our industry about the issues around asset retirement and liabilities, and what it means in a shifting political and environmental landscape”, says Darryl Stackhouse, President and CEO of XI Technologies. “What we wanted to present at this session were concrete ideas of what the industry can do about retirement obligations now and how to develop strategies for tomorrow. The industry is in this together and we believe that by working together, we can find solutions to liability issues”.
“There’s a unique opportunity in the ARO space today for those ready to capitalize on it”, declared Randy Green, Sr. Vice President, Asset Management with Sproule, who served as moderator for the discussion. “We have an industry-friendly government engaged in an AER review, giving the industry an opportunity to influence public policy and our regulatory framework”. Green would go on to explore eight common themes arising from previous ARO industry discussions, such as access to capital, turning liabilities into an opportunity, standardized ARO evaluations, and close performance incentives.
Kevin Kynoch, Managing Director with ATB Financial presented some best practices for asset-holders to help their banking partners and potentially receive more capital. From his perspective, lenders are looking for details on any ARO variances relative to amounts reported in third party engineering reports, financial statements, or amounts as reported by the AER. If you have a difference between what your reports say your ARO is and what the AER says it should be, your bank will want to know why. Which makes third party independent reporting data for ARO highly useful.
Figure 2 – XI Technologies assembled a panel of experts from areas such as finance, legal, production, insurance, and environment to discuss liability obligations.
“Canadians expect the oil and gas industry to take care of their liabilities” said Alan Harvie, Sr. Partner, Environment & Energy with Norton Rose Fulbright, providing a legal perspective to the panel. Mr. Harvie regularly advises clients about environmental assessments and discussed that in this role he typically sees AROs understated when a purchaser is considering an asset, due to moving targets throughout the lifespan of a well. To combat this, he recommends a system that pays particular attention to working interest and how it affects a company’s liabilities, as it tends to be a major gap in the ARO puzzle.
Grant Cutforth, Manager – Business Development with Surge Energy shared some best practices he and his team have implemented from a producer standpoint. Surge has been very proactive in tackling their liabilities, taking advantage of the Area Based Closure program and the efficiencies gained from it, resulting in a 50% reduction in spending. In addition, for M&A, Surge now brings the Regulatory, Safety & Environment team into the evaluation process at a very early stage and includes estimates for additional hidden costs when making their evaluations. This protects them against high liability transactions and puts them in a position to answer questions potential buyers might have of their assets.
From an insurance perspective, Andrew Ramsay, Vice President & Account Executive, Energy, with Aon Commercial Risk Solutions, discussed the hard market the industry currently faces for the first time in 17 years. This has led to increased scrutiny for everything from aging infrastructure, pipeline integrity, and now AROs and what that can mean to an insurance program. And with this insurance market, it’s incumbent on asset holders to ensure they have a plan around their AROs as part of their full proposal if they want to get the coverage they need as insurance starts to take a deeper look at liabilities.
“The underpinning of every strategy people should consider in ARO planning are three key pillars: assessment, strategy, and execution” says Ryan Smith, CEO of 360 Energy Liability Management. For assessment, a full understanding of the entire costs to closure are key. For strategy, organizations must select a strategy that fits their goals and the timelines of their assets. And for execution, Smith stresses the importance of having teams focused only on asset retirement activities, rather than part time resources who can miss opportunities for reductions.
These are just some of the insights offered at the event. It was a diverse expression of ideas and a positive environment of industry leaders looking for solutions to our collective issues. XI Technologies believes that the issues currently posed by liabilities can be tackled when an engaged industry focuses and collaborates to face them and are proud to offer forums such the ARO Best Practices leadership panel to begin that collaboration. If you’d like to view the presentation slides used at the event, you can download them here.
In addition, XI Technologies offers a solution to some liability challenges with ARO Manager, a tool to help companies evaluate, track, manage, and report on asset retirement obligations. Companies can utilize a standardized cost model to assess total liabilities, or they can import alternate cost models and perform scenario analysis to determine the most efficient, low-cost approach to meeting the mandatory abandonment and reclamation deadlines.